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Wednesday, 5 August 2015

How to structure your salary to save tax

Getting your pay
structure right is one of the best ways to make use of every paisa from
your salary. If done smartly, it would help increase your take-home
salary and reduce tax liabilities to a great extent.
It is better to sit with your employer while structuring your salary.

Here are some changes you can introduce:

The Ideal Salary Structure

Salaries
vary from individual to individual and so do the salary structures.
However, there are certain steps that every employee must take to
restructure their salary and minimize tax payouts. The best is to use
different allowances, such as House Rent Allowance (HRA), transport,
medical and education allowances, to your advantage when paying taxes.

1. House Rent Allowance:
HRA is a very important component of your salary. In some cases, the
rent that is paid for accommodation can be fully exempt from taxes.
Employees who live with their parents are entitled to full HRA tax
exemption. Full HRA exemption is possible on these three conditions:
a. Actual HRA received.
b. Rent paid minus 10% of the basic pay.
c. 50% of the basic pay if you live in a metro city and 40% of the basic pay in other cities.
The
main documents that are required for an HRA exemption claim include the
rent agreement and receipts or cheque payments made towards the monthly
rents in a financial year.

2. Medical Reimbursements:
As an employee, you can get tax exemptions on all medical expenses
incurred on your own health or that of your family. If you have original
bills to submit to prove the expenses incurred, you can claim a tax
exemption up to Rs 15,000 per annum. That means you can boost your
take-home pay by Rs. 1250 each month.

3. Transport Allowance:
A nominal transport allowance of Rs 1600 is permitted to employees
without having to show any documents. That means one can get Rs 19,200
per annum of tax free income in the form of transport allowance. For
those employees whose transport allowance expense exceeds Rs 19,200, it
is compulsory to furnish the related expense documents.

4. Children Education Allowance:
The Income Tax Department permits employees with children to get Rs.
100 each month per kid, for up to two children. That means you can get a
maximum of Rs. 200 in the form of children education allowance per
month. For those employees whose kids stay in hostels, this amount
increases to Rs 300 per child each month. For those with two children
studying in a boarding school, with necessary documents in place, you
can add Rs 600 more to the take-home salary.

5. Leave Travel Allowance:
Popularly known as LTA, this allowance is another good option for
employees when it comes to saving on tax charges and increasing the
take-home salary. The Income Tax Department applies a four-years block
provision for the same. This means you can claim LTA for a maximum of
two times in one 4 year block. You can even get it fully exempted once
in two years. This allowance is a special scheme for employees and their
employers. However, evading this tax charge is subject to preconditions
that need to be fulfilled when filing for an LTA claim.